Is Rental Income Taxed? Yes — But Not on the Amount You Think

The first year you rent a property out, the question tends to arrive in a slightly panicked form: the tenant pays me every month — am I taxed on all of it?

No. You're taxed on what's left after the costs of running the place, and for a lot of landlords that figure is dramatically smaller. Sometimes it's nothing at all.

Gross versus net

Rent received is the starting point, not the answer. Against it you set the costs of owning and running the property — mortgage interest, insurance, property taxes, repairs, management fees, and depreciation.

What's left is your taxable rental profit, and that's added to your other income and taxed at your normal rates. There's no special rental tax rate.

The bit that confuses everyone

That example isn't unusual. Depreciation is a deduction you never actually pay, so a rental can be comfortably cash-positive and still show a loss on your return.

Which raises the obvious next question: if it's a loss, does it reduce the tax on my salary?

Often not, and that catches people out badly. Rental losses are usually treated as passive and can't be set against employment income — though there's an allowance of up to $25,000 for landlords who actively participate, phasing out above $100,000 of income. We work through it in why you can't deduct your rental loss.

What it depends on

Which costs you're actually claiming. Most first-year landlords miss several, and depreciation is the big one. The full list is worth ten minutes.

Whether it's a genuine rental. Renting to family below market rate, or using the place yourself part of the year, changes the treatment.

Your other income. The rental profit sits on top of it, so the same property costs two different landlords different amounts.

The number that actually matters later

Year-to-year rental profit is rarely where the money is. The large numbers arrive when you sell — and they surprise people, because depreciation you claimed along the way gets settled up then.

Our calculators cover both ends: what you might not be claiming now, and what a sale would cost later. Free, no sign-up.

If your first return is coming up and you'd rather not guess, you can ask to be introduced to a specialist in your state — no commitment or fee required.